'Pivotal' June inflation data offers hope for September rate cut, asset managers say

Asset managers are betting that another softer-than-expected inflation print for June suggests the Federal Reserve could begin cutting interest rates as soon as September.

The Fed could also slash rates again in December as long as inflation continues to cool, said Skyler Weinand, chief investment officer at Regan Capital with $1.5 billion in assets under management.

Weinand noted, however, that while the market is expecting a total of five rate cuts over the next 12 months, that projection might be “too optimistic.” The inflation picture, he added, is “not likely to improve enough in the next year to warrant five rate cuts.”

Lindsay Rosner, head of multisector investing at Goldman Sachs Asset Management, characterized the June inflation data as “pivotal” and will likely help the Fed to gain confidence inflation is still moving in the right direction.

“The economic data heat wave seems to have subsided as we are getting cooler inflation data on the heels of cooler labor market prints last week,” she said. “Cooler temperatures forecast a Fed cut in September.”

GSAM has $2.8 trillion of assets under supervision.

The Bureau of Labor Statistics reported on July 11 that the consumer price index rose an annualized 3% from a year ago in June, slightly below expectations, and also below the 3.3% figure recorded in May. Economists were expecting a 3.1% annualized CPI figure for June, according to financial data firm FactSet Research Systems.

Excluding the volatile food and energy sectors, the core CPI rose by an annualized 3.3% in June, below the 3.4% pace reported in the prior month, and marking the smallest such 12-month increase since April 2021.

Weinand of Regan Capital also observed that many investors are thinking about how the November presidential election may affect the specific timing of the Fed's next move on interest rates.

“But the bigger issue is how whoever is elected will handle budget deficits,” he explained. “The Fed is in uncharted territory having to confront fiscal spending like they have never had to do before. If the Treasury prints four more years of $2 trillion deficits, it may not matter how many times the Fed cuts interest rates, as the fiscal spending could spark a period of hyperinflation.”

John Kerschner, head of U.S. securitized products at Janus Henderson Investors, which has $352.6 billion in AUM, said the market is now expecting three cuts by the end of January 2025. Noting that Fed Chair Jerome Powell recently said that the risks towards inflation are now more "balanced," Kerschner said “today's (CPI) number reinforces that view and perhaps now tilts the scale towards concerns of a sharper slowdown in the U.S. economy.”

The Fed has considered the inflation rate a key factor in its monetary policy decisions.

The Fed’s key short-term interest rate is now in a range of between 5.25% and 5.5% after the central bank kept rates unchanged for the seventh consecutive time at its most recent meeting on June 12.

As of the morning of June 12, according to CME Group's FedWatch tool, shortly after release of the CPI data, market participants' pricing of fed fund futures indicated there is a 91.2% probability that the Fed will again keep rates unchanged when it issues its next monetary policy decision on the afternoon of July 31, and only a 8.8% probability it will cut rates by 25 basis points.

However, Fed fund futures are predicting an 81.3% likelihood of a 25-bp rate cut at the Sept. 18 meeting.